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Ethanol Suffers Rare Loss in Senate

Tax Breaks of $6 Billion a Year Now at Risk as Lawmakers Look for Ways to Reduce Budget Deficits

By

Naftali Bendavid And

Stephen Power

June 17, 2011

A broad bipartisan majority of the Senate voted Thursday to end more than three decades of federal subsidies for ethanol, signaling that other long-sacrosanct programs could be at risk as Democrats and Republicans negotiate a sweeping deficit-reduction deal.

The tax breaks, which now cost about $6 billion a year, had long been considered untouchable politically because of the power of farm-state voters and lawmakers. Iowa's role as the site of the first presidential caucuses has further elevated the political potency of the biofuel.

The Senate voted to repeal a $6 billion tax credit for ethanol producers, a move that could signal the end of some federal subsidies as part of an eventual budget compromise. Joe White has details.

Presidential hopefuls made a quadrennial ritual of going to Iowa and pledging to support the tax breaks, tariffs and mandates that supported production of ethanol motor fuels from corn. This year, however, some Republican presidential candidates have pointedly refused to endorse ethanol tax breaks.

Thursday's vote doesn't by itself doom federal support for the corn ethanol industry. The House is expected to reject the repeal as unconstitutional because tax bills must originate in that chamber, and the White House opposes it. But the 73-27 vote signals that once-unassailable programs could be vulnerable.

Residents build a levy to protect the Golden Triangle ethanol plant in Craig, Mo., from floods last week.
Associated Press

The ethanol vote was sponsored by Sens. Dianne Feinstein (D., Calif.) and Tom Coburn (R., Okla.) and driven by a coalition of liberal lawmakers and fiscal conservatives. Some of them want to end subsidies for wealthy interest groups and others are looking for cuts before slashing social-welfare programs. They were opposed by a bloc of farm-state lawmakers seeking to fend off the repeal or slow it down.

The Senate action could also open the door to attacks on other tax breaks, such as those benefiting oil companies, in the interest of deficit reduction. Republicans have been wary of doing so, but 33 Republicans joined 40 Democrats and Independents in supporting Thursday's repeal, which has the effect of raising taxes on oil refiners.

Still, Republican leaders have so far given no indication that they would be open to any other tax increases, and have insisted tax increases are off the table in the bipartisan budget talks.

The shift in the political climate has come rapidly. As recently as December, Congress voted to extend the ethanol subsidy for another year. But ethanol has come under increasing fire from diverse groups, including food industry groups concerned about rising corn prices and environmentalists who had concluded corn ethanol wasn't an effective way to reduce greenhouse gas emissions.

Currently, much of the gasoline sold at service stations across the country contains up to 10% ethanol, in part because of federal regulations that effectively require it. The Obama administration has proposed pushing the blend limit to 15%, despite objections from auto makers worried that higher ethanol levels would damage engine components in cars.

Auto makers design many so-called "flex fuel" vehicles to run on ethanol blends up to 85%. But few service stations outside the Midwest offer such fuels.

The ethanol industry and its supporters, who have been bracing themselves for an end to the tax break, were critical of the vote. "We need a glide path, and not a cliff, for the only alternative to oil," said Sen. Amy Klobuchar (D., Minn.). "We're talking about pulling the rug out from an industry that provides 10% of the nation's fuel supply."

Repeal supporters said the $6 billion-a-year subsidy amounts to wasteful support for a fuel whose promises of cost savings, lower pollution and energy efficiency have not materialized. "This industry has been collecting corporate welfare for far, far too long," said Sen. John McCain (R., Ariz.), who's been fighting the subsidy for years.

Mr. McCain offered another measure, to block federal funding for ethanol pumps and storage facilities, which failed 41-59. The House adopted a similar amendment.

Gasoline blenders currently get a tax credit of 45 cents for every gallon of ethanol they blend with motor fuel. Tuesday's amendment would repeal that as well as a tariff of 54 cents a gallon on imported ethanol.

The Renewable Fuels Association, an ethanol industry group, criticized the action, noting that the Senate "voted less than one month ago to preserve billions of dollars in taxpayer handouts to the oil industry."

The tax break benefits the ethanol industry, which is dominated by commodity giants such as
Archer-Daniels-Midland Co.
ADM -1.24%
, of Decatur, Ill., by sweetening the financial incentive for gasoline retailers to use ethanol.

The government began subsidizing ethanol use in the late 1970s amid hopes that it would help wean the country from foreign oil. But food companies and livestock farmers have complained that their costs have exploded as five billion bushels, or 40% of all the corn grown in the U.S. last year, was consumed in ethanol production. The price of corn has traded above $7 a bushel for much of the spring, twice the year-ago level.

Some economists doubt that the tax credit is now crucial for the industry. The ethanol industry only began to grow rapidly five years ago when new energy legislation required gasoline retailers to use corn ethanol: 12.6 billion gallons this year, moving to 15 billion gallons in 2015.

The tax credit is part of the reason the gasoline industry buys more than one billion gallons a year than required by federal mandate. But if it expires, ethanol demand wouldn't fall below the mandate, preventing financial calamity for producers, said Bruce Babcock, an Iowa State University economist. "The ethanol industry doesn't need the tax credit anymore," he said.